The funds that have (almost) never lost money: IA Targeted Absolute Return

Five funds in the IA Targeted Absolute Return sector have managed to make a positive return in nine of the past 10 calendar years, according to data from FE Analytics.

Of the 15 funds in the sector with a track record of this length, another six made a positive return in eight of the past 10 calendar years, one managed it in seven and three managed it in just five.

Newton Real Return came the closest to going through the whole decade without losing money in a calendar year. The one 12-month period when it was down, 2011, it fell by just 0.75 per cent.

Funds that made a positive return in 9 of past 10 years

Source: FE Analytics

Newton Global Dynamic Bond was only marginally behind it, losing 0.76 per cent in 2015.

Newton Real Return, managed by Iain Stewart since 2004, aims to achieve a positive absolute return on a rolling three-year basis.

Square Mile Investment Consulting & Research described it as “an appealing option for investors seeking a fund that is focused on capital preservation and delivering positive absolute returns over the long term”.

“The fund operates with a core of return-seeking assets, and these are complemented with stabilising assets and hedging positions to dampen volatility and provide downside protection,” said the team.

“Derivatives and hedging strategies are employed for efficient portfolio management and downside protection, but the manager will not use leverage or sell short individual stocks.”

Newton Real Return is £9.5bn in size and has ongoing charges of 0.8 per cent. It made a total return of 48.44 per cent over the period in question.

Paul Brain, manager of Newton Global Dynamic Bond, splits the fund into four distinct parts: developed market government bonds, investment grade credit, sub investment grade credit and emerging market sovereign bonds.

Square Mile said the combination of these assets over time should provide a good risk/return trade off as, historically, they have been affected by different economic and market factors and tend not to all move in tandem with each other.

“We believe that this is a solid fixed income fund run by an experienced manager,” the team added.

“The focus on risk, and in particular on downside risk, makes this fund an attractive proposition for investors who wish to gain access to various parts of global fixed income markets but who are mindful of the capital volatility of their investments.”

The £2bn Newton Global Dynamic Bond fund has ongoing charges of 0.8 per cent and is yielding 2.76 per cent. It made 59.86 per cent over the 10-year period in question.

Even though the maximum calendar-year loss of the two Newton funds stands at less than 1 per cent, the maximum drawdown figures for the two stand at 17.42 per cent for Newton Real Return and 10.06 per cent for Newton Global Dynamic Bond.

Performance of funds vs sector over 10yrs

Source: FE Analytics

BlackRock UK Absolute Alpha has the lowest maximum drawdown of the five funds on the list, with a figure of 9.39 per cent. This is a UK equity long/short fund that aims to achieve a positive absolute return for investors regardless of market conditions. Managers Nick Osborne and Nigel Ridge use contracts for differences (CFDs) to secure short positions, aiming to make money when share prices fall as well as rise.

Juliet Schooling-Latter, research director at FundCalibre, described this fund as a “very useful portfolio diversifier, with much lower volatility than the UK equity sector average”.

“Osborne and Ridge have a pragmatic approach to stock selection which we like, taking the macroeconomic environment into account as well as looking at each individual company's fundamentals,” she said.

“The managers aim to identify a catalyst that could either unlock potential value and increase the price of a share, or destroy it in the case of a short holding.”

“The extensive primary research carried out by BlackRock’s equity teams ensures that the majority of added value in the team's investment process comes from stock selection and the sharing of ideas is a key strength.”

However, BlackRock UK Absolute Alpha has not been as successful from a total return perspective, returning just 34.49 per cent over the 10-year period.

The £422m fund has ongoing charges of 0.92 per cent.

IFSL Brooks Macdonald Defensive Capital delivered the highest total return of the five funds on the list. Its gains of 63.47 per cent over the period in question are more than twice as high as the 30.42 per cent delivered by the sector.

However, when the fund lost money in 2008 it ended the year down by 18.57 per cent. Meanwhile, its maximum drawdown of 25.92 per cent is the highest of the five funds that made the list.

IFSL Brooks Macdonald Defensive Capital is a multi-asset fund that aims to achieve positive absolute returns over rolling three-year periods through a portfolio of preference shares, loan notes, convertibles, structured notes and other defined return investments, including collective investment schemes and transferable securities.

Schooling-Latter described this as “a true multi-asset fund” and said that the consistency with which it beats the sector more than makes up for the above-average volatility.

“Managers Jon Gumpel and Niall O’Connor use the range of tools available to them to dial up or dial down the fund’s sensitivity to market movements, which results in an intelligent investment mix that will see investors through a range of market conditions,” she explained.

“A key feature is that investments often do not require market growth to provide a positive total return and are supported by having significant underlying asset cover.

“The fund is designed to perform well in most market conditions, however, it is likely to underperform in very strong rising markets, and outperform in flat or slightly falling or slightly rising markets.”

The fund is £539.7m in size and has ongoing charges of 0.82 per cent.